Friday, December 21, 2012Last Update: 12:50 PM PT

Shareholders VeriFone Claims Revived in 9th

(CN) - VeriFone must face stockholders' claims that company leaders deliberately overstated earnings in the wake of a merger, the 9th Circuit ruled Friday. The share price for the San Jose-based VeriFone, which makes electronic-payment systems, dropped over 45 percent in one day in December 2007 after the company admitted that it had misstated earnings for three consecutive quarters. In the days after the drop, investors filed nine securities fraud class actions against the company. The Securities Exchange Commission sued the company in 2009. Eventually the class actions were consolidated, with the National Elevator Industry Fund as lead plaintiff. This action alleges that former CEO and chairman Douglas Bergeron, and former CFO and executive vice president Barry Zwarenstein, deliberately lied in public about the company's earnings to meet the expectations of a merger with Israel-based Lipman Electronic Engineering. The executives had projected that the merger would spur a sharp increase in earnings, and when that didn't happen three quarters in a row they fudged the numbers to make it seem like a success, the class said. Zwarenstein and Bergeron allegedly "suggested accounting adjustments" to supply chain controller Paul Periolat, which "enabl[ed] VeriFone to report results in line with its projections," according to the court's summary of the claims. It is undisputed that the company misreported its earnings. An outside auditor eventually discovered the irregularities, forcing VeriFone to announce that its statements for the quarters in question "should not be relied upon due to errors in accounting related to the valuation of in-transit inventory and allocation of manufacturing and distribution overhead to inventory," the ruling states. The audit revealed that the company had overstated its earnings over the three quarters by 129 percent. Taken together, operating income for the three quarters fell from $65.6 million to $28.6 million, and the share price dropped from $48.03 to $26.03. But whether Bergeron and Zwarenstein acted with intent is still in doubt. Scienter is a legal term that involves a showing of intent to deceive or an extreme departure from the standard of ordinary care. U.S. District Judge Marilyn Patel dismissed the case in San Francisco, finding that the plaintiffs had failed to show such evil intent. The 9th Circuit reversed on Friday. "It defies common sense that for three straight quarters following a merger, when preliminary reports came in substantially below expectations and the acquired company had lower margins, the correct 'adjustments' to flash reports also happened to be the precise amounts Zwarenstein and Bergeron had identified as necessary to hit earnings targets," Judge M. Margaret McKeown wrote for a three-judge panel in San Francisco. "Yet Periolat's adjustments consistently matched the figures Zwarenstein and Bergeron gave him. In the face of repeated such adjustments, the company cannot simply close its eyes with a sigh of relief." "Although VeriFone, Bergeron, and Zwarenstein attack individual allegations in isolation, they cannot overcome the overwhelming inference drawn from a holistic view," McKeown added. "Upon receiving accurate reports that VeriFone's margins and earnings were short of projections, Bergeron and Zwarenstein repeatedly 'remedied' the problem by directing baseless adjustments to the company's financial statements, failing to inquire further once projections were met at the same time they encouraged employees to engage in 'aggressive' accounting to ensure VeriFone hit other financial targets." In 2011, the U.S. government filed an unrelated complaint against VeriFone over its acquisition of Hypercom Corp., and its related licensing agreement with Ingenico, of France.